Equations

August payrolls, due Friday, could mark the last of the “easy” jobs reports, and thereby the last chance for The White House to claim the recovery is continuing apace.

Consensus is expecting another big gain. The market will be looking for 1.4 million on the headline, and a sub-10% print on the unemployment rate. It would mark the first time the jobless rate has fallen below 10% since the onset of the pandemic.

For context, the US labor market would still be less than halfway to pre-pandemic employment even if the August report manages to meet estimates. The pink bar and figure in the chart (below) assume an in-line print for August.

Close attention will be paid to fresh reads on permanent and temporary employment. Earlier this month, Goldman estimated that around 25% of those currently on “temporary” layoffs would become permanent job losers in the coronavirus recession.

The number of Americans unemployed for 15 weeks or longer is close to topping its GFC high, and as a percentage of the total jobless, those unemployed for 15-26 weeks sits at nearly 40%.

Still, if the “official” unemployment rate falls below 10%, it will give the administration another talking point, even as 9.8% would be nearly triple pre-COVID levels.

During an interview with Fox’s Sean Hannity this month, Mike Pence made the outlandish claim that the jobs added back in May, June, and July count as organic job “creation”, and therefore, he and Trump created more jobs in three months than Barack Obama created in eight years.

That kind of claim is enough to drive the fervently engaged to the brink of insanity. It’s been nearly two decades since I’ve been overtly “fervent” about such things, and having been inexplicably bestowed with the gift of a pensive disposition some years ago, I have the luxury of just sitting back and chuckling at the sheer audacity and absurdity. That, in turn, gives me the patience to calmly and objectively point out that no matter who one is inclined to vote for in November, the following equation just “is what it is”, to quote the president’s remarks on America’s virus death toll: -22 million + 9 million = -13 million. The visual (below) serves as a helpful guide.

Obviously, the green bar counts jobs created during Trump’s first three years in office, so the chart is not an attempt to downplay the administration’s contribution to the expansion. Rather, the point is that when you lose 22 million jobs in two months to what amounts to a natural disaster, the proper way to “brag” about subsequent jobs gained is to simply say that Americans are getting back to work. Attempting to conflate the economic disaster recovery effort with a pre-disaster labor market to score political points isn’t just distasteful, it’s silly.

The jobs report isn’t the only key data point on deck in the new week. Like every week since the onset of the pandemic, jobless claims will be in focus. Initial claims topped 1 million again last week, and there’s no concrete sign of a break in the D.C. deadlock. Nancy Pelosi is said to have rejected Mark Meadows’s latest offer, which, at $1.3 trillion, was still nearly $1 trillion short of Democrats’ compromise proposal. Janet Yellen this month lambasted the Senate for its initial role in holding up a deal, blaming the chamber for going on vacation while Americans “starve”.

Tuesday brings ISM manufacturing and Thursday ISM services, both of which will be set against upbeat reads on IHS Markit’s PMIs for August. Consumer sentiment remains mired in a depressing range.

A hodgepodge of Fed speakers are on deck, and their remarks will be parsed for more clarity on average inflation targeting, unveiled to much fanfare last week by Jerome Powell. Clarida speaks Monday, Brainard Tuesday, and Williams and Mester on Wednesday.

As for equities, which are coming off a fifth consecutive week of gains and an eighth in nine, the same bull case generally applies. Deeply negative real rates bodes well for risk assets, and if all else fails, bulls can lean on Old Faithful: the ubiquitous “cash on the sidelines” thesis (figure below).

There’s also a sense in which no one believes the Fed would countenance a deep selloff, especially not with fiscal stimulus still held up by a paralyzed legislature, and a White House which, to speak frankly, is wholly detached from reality on any number of Main Street issues.

“Traders should note positioning is not extremely bullish”, BofA’s Michael Hartnett said late last week, offering the following equation, which makes a bit more sense than Mike Pence’s math: “Positioning (not extremely bullish) + Fed (dovish) + EPS/GDP (on the rise) + virus (on the wane) all say this is not the Big Top”.

That said, valuations are, of course, pretty stretched. And while real rates aren’t likely to stage any kind of destabilizing surge, nominal yields at the long-end reacted as you’d expect last Thursday to Powell’s big unveil.

Yields out to the 10Y fell on Friday ahead of index duration extension, but 30-year yields are up ~30bps in August. Whether stocks can stomach a sizable move higher is the subject of some debate headed into a September that some say could bring more pain for bond bulls.